The Conceptual Foundations
of Democratic Capitalismby Dr. Edward Younkins Professor of Accountancy
and Business Administration at Wheeling Jesuit University in West Virginia
and author of Capitalism and Commerce.Democratic capitalism, the
cornerstone of American society, is far more than an economic system: it
is a dynamic complex of economic, political, moral-cultural, ideological,
and institutional forces. This article provides an introduction to the
fundamental concepts that inform American democratic capitalism, concepts
that have evolved over centuries in such disciplines as philosophy, economics,
law, history, political science and sociology. The survival of democratic
capitalism may be in jeopardy unless we understand and appreciate its conceptual
foundations. In addition, the nations
of Eastern Europe are engaged in revolutionary programs of economic, political,
and social reform moving them toward the combination of democracy and market
economics. An understanding of the concepts described herein will help
to make sense of these developments. The complex interaction
among its various concepts would render a discrete analysis of democratic
capitalism superficial. Thus, my approach is conceptual and stresses the
complex, interrelated element of this politico-economic system. DEMOCRATIC CAPITALISM:
AN OVERVIEWAccording to Michael Novak,
democratic capitalism is an amalgam of three systems: (1) an economy based
predominantly on free markets and economic incentives; (2) a democratic
polity; and (3) a classical-liberal moral-cultural system which encourages
pluralism. The free market creates an intricate web of supply and demand
relationships and fosters economic growth, social mobility, and innovation.
Political liberty allows for a constitutional system of government in which
both individuals and groups are represented. The moral-cultural sphere,
which includes values such as a work ethic, individual initiative, honesty,
and respect for private property, is supported by the mediating institutions
of family, church, and numerous other voluntary associations.(1)Under this system of natural
liberty, we are free to form innumerable voluntary associations such as
the corporation and the labor union. Our political system assumes pluralism,
recognizes that individuals have differing opinions and interests, and
allows them to associate freely in order to further those interests. Pluralism's
dynamic multiple groups function to balance and check power. Capitalism is an economic
system characterized by freedom of thought and voluntary action creatively
applied to production; it is based on private property rights, economic
justice, the profit motive, competition, a division of labor, and requisite
social cooperation. Democracy is based on the
principles of consent and political equality, and may be defined as a political
system in which governments are established by majority votes cast in regular,
uncoerced elections. It is often argued that capitalism is a necessary
but not a sufficient condition of democracy since democracy requires basic
economic rights that are separate from the state.(2)From a conceptual and deductive
perspective, philosophy precedes and determines politics which, in turn,
precedes and determines economics. For example, philosophers such as John
Locke, David Hume, Baron de Montesquieu, and Adam Smith exerted a profound
influence on the thinking of James Madison, John Adams, Thomas Jefferson,
and other architects of the U.S. Constitution. The resulting political
system allowed for the development of free-market capitalism. The Founders
clearly understood that economic freedom is necessarily linked to political
freedom. Competition turns self-interest toward efficiency, fosters voluntary
social cooperation through mutually beneficial exchanges, and thereby maximizes
social welfare. Thus, self-interest can, and frequently does, contribute
to economic abundance, political liberty, and a free pluralistic culture.
This, precisely, is Adam Smith's "invisible hand" in action. FREEDOM - THE KEY CONCEPTIntegral to the American
political ethos is the belief that human beings, by virtue of being human,
possess the capacity to exercise free will and have an inalienable right
to do so. We are free to own property, choose a career, worship, speak,
travel, promote and protect our self-interest, contract, compete, create,
associate with others, etc. But the American concept of freedom is not
absolute. Our notion of ordered freedom, freedom under the law, derives
the intelligibility of the free act from reason, law, duty, responsibility,
reflection, and a rightly ordered conscience. Real freedom is the ability
to do what is right-not the license to do wrong.(3)Our conception of freedom
is circumscribed by laws, regulations, and customs. In securing individual
freedom, we find it necessary to restrict certain behaviors that impinge
upon the freedom of others. In our society, freedom to act (i.e., substantive
freedom) depends upon freedom from inhibiting factors (i.e., procedural
freedom). When people are free to work and keep the fruits of their
labor, they are being treated justly. Justice is the virtue of granting
each person his due. As people recognize that rewards depend on their efforts
and outputs, their incentives to produce grow stronger. The virtues of
freedom, justice, and productivity cannot be separated. True freedom of association
is possible only in an open society. Natural associations, such as the
family and the state, are necessary for civilized human existence. Other
forms of association, such as the corporation and labor union, develop
from the peculiar needs of their participants.(4)THE CORPORATION AND THE
LABOR UNIONIn the United States, the
power to incorporate is freely available under incorporation statutes that
merely require the filing of information concerning the financing and intended
activities of the new association. Corporations are granted special advantages
over other forms of business organizations such as: (1) limited liability
whereby owners are liable for corporate debts only to the extent of their
investment; (2) the power to contract as a single agent under the law;
and (3) continuity of organizational existence beyond the lives of the
owners. These unique features of the corporation can alternatively be explained
in terms of its contractual origins. They may be viewed as the product
of a contract between shareholders and those who find these provisions
acceptable. No one is forced to deal with the corporation. For example,
limited liability is not a privilege that is necessarily guaranteed to
a corporation. A would-be creditor can decline credit to a corporation
unless one or more of its stock-holders assumes personal liability for
the obligation.(5)It is inconceivable that
the tremendous technological and social progress Americans have witnessed
over the past two hundred years could have occurred without the accumulation
of large sums of capital directed at specific tasks. Without the ability
to incorporate, large businesses would have the logistical nightmare of
orchestrating thousands, perhaps millions, of individual investors toward
the same economic goal. Our status as the world's leading economic power
owes much to our ability to incorporate and to the respect for voluntary
organizations on which this legal person is built. As a form of free association,
the labor union may be viewed as a rebuttal to the idea of self-reliance.
According to this view, the industrial revolution required only specialized
repetitive skills which led to workers loss of self-identification and
self-respect. This view is especially pronounced among Marxian theorists.(6)According to Walter Block,
unionism consists of both voluntary and coercive elements. Voluntary unions
restrict themselves to activities such as mass walkouts and boycotts. Coercive
unions are those that promote their interests both by legitimate (non-rights-violating)
behavior and by the illegitimate use of physical force aimed at nonaggressing
individuals. For example, picketing must be viewed as illegitimate when
its purpose is to coerce and physically prevent suppliers, customers, competing
laborers, and others from dealing with the struck employer. Since both
union and nonunion workers possess the same human rights, nonunion workers
have every bit as much a right to compete for jobs as do union workers.
Because a job is the embodiment of an agreement between two consenting
parties, it cannot be "owned" by anyone person or group. If voluntary association
and mutual consent are the legitimate foundations of employment, one group
of workers forcibly preventing another from competing for jobs must be
viewed as illegitimate.(7)Libertarian economists view
unions as labor monopolies whose primary impact is to raise members' wages
at the expense of unorganized labor and the most efficient functioning
of the economy. This perspective stresses the adverse effects of union
work rules on productivity, the loss of employment in the organized sector
due to union wages, and the resultant crowding of the nonunion sector with
displaced workers. Others laud unions for increasing the development and
retention of workers' skills, providing information about what occurs on
the factory floor, improving worker morale, pressuring management to be
more efficient, and providing workers with protection against arbitrary
management decisions.(8)The traditional view of
the responsibilities of the corporation and labor union is that a corporation
should use its resources and engage in legal activities intended to maximize
stockholders' profits. Similarly, the sole responsibility of labor leaders
is to represent the interests of their members. A more recent perspective
is that corporate executives and labor leaders have a social responsibility
that goes beyond serving the interests of their stockholders or members. SOCIAL RESPONSIBILITYThe idea of social responsibility
gained adherents in the early twentieth century, when corporations were
routinely criticized for being too large, too powerful, antisocial, and
for engaging in anti-competitive practices. Cognizant of this growing antibusiness
sentiment, some business leaders began to use their private wealth and
power for community and social improvement. The stewardship principle was
invoked to urge managers to view themselves as trustees of a larger public
interest. According to this view, managers should act in the interest of
all those who are affected by a firm's actions, not just stockholders and
directors, but employees, customers, suppliers, communities, and society
in general.(9)Two general worldviews –
individualism and communitarianism – are much debated in
contemporary American society. One's position regarding social responsibility
may depend, in part, on which side of this debate he or she finds most
convincing. Individualism involves the
atomistic – some would say reductionist – idea that society is no more
than the sum of the individuals who compose it. Corporations are thus viewed
as expressions of individual freedom, do not derive their power from society,
owe nothing to the community, and need only pay taxes and adhere to government
regulations. In other words, management is accountable for the sole task
of employing the stockholders' capital in the most profitable manner for
the stockholders' benefit. Specialization of effort and promotion of group
interests (e.g., stockholders, employees, creditors, etc.) are viewed as
the best organizing mechanisms for society. When each group legally pursues
its own self-interest the result is the greater good of society.(10)Conversely, according to
the tenets of communitarianism, a perspective championed by the sociologist
Amitai Etzioni, individuals have certain social responsibilities to the
larger community by virtue of their membership in that community. Thus,
the corporation, as a "possession" of the community rather than of individuals,
holds a social contract with society from which it derives its existence
and, therefore, should serve a constellation of interests. According to
the tenets of communitarianism, while managers have direct obligations
to stockholders and employees, they should also address the needs of their
customers, suppliers, creditors, and the larger community from which the
corporation is said to derive its existence.(11)VALUESThe moral-cultural sphere
provides values which give order, coherence, and moral direction to society.
Values underlie the most important human concerns. The family, along with
various religious, educational, social and cultural institutions, reflect
and transmits these values intergenerationally. Some of the traditional
values that allowed for the emergence of democratic capitalism include:
enlightened self-interest; hard work and perseverance; self-reliance and
self-control (deferred gratification); thrift and saving; the right to
acquire and enjoy wealth; skepticism of centralized political power; and
belief in justice, honesty, duty, and fair play, i.e., an objective moral
order. The most significant threat
to American democratic capitalism may lie not in the economic or political
spheres but in the moral-cultural sphere. Religious justification for wealth
accumulation and self-restraint has been largely replaced by a rationalistic
belief in material and secular progress as ends in themselves. The resulting
tendency is to seek possessions rather than to develop personal character.
This hedonism is further supported by a spiritual alienation that revolts
against authority, reason, objectivity, and the idea of an ordered existence.
Humans are no longer viewed as having fixed natures; rather, the emphasis
has turned to the uniqueness of each individual, immediacy, emotion, unfettered
self-expression, and a reflexive rejection of the "old" for the "new."
But a hedonistic society will tend to expand its claims on government.
Self-reliance inevitably gives way to a sense of entitlement. Luxuries
become necessities, and necessities become rights. Ultimately, the political
order is relied upon to provide social, political, and economic equality
– both of opportunity and of outcome.(12)
Representatives of this counterculture repudiate the possibility of any
objective, eternal, absolute moral standards by which human deeds can be
measured. Communitarians are especially strident in their desire to avoid
debate of first moral principles, arguing that human nature is dynamic
and plastic, and that we need only engage in "dialogue" and "consensus-building"
within and across communities in order to locate shared values.(13)PRIVATE PROPERTYHistorically, respect for
private property has been one of the most important and enduring values
in American society. The protection of private property rights is generally
viewed as essential for the preservation of individual freedom. According
to John Locke the application of labor to land naturally results in privately
held property. In Locke's view individuals form societies in order to gain
the collective strength to secure and defend their privately held properties.
The essence of Locke's "economic man" is that the ownership of private
property is a natural right. The inalienable rights of life, liberty, and
the pursuit of happiness included in the Declaration of Independence are
Lockean in nature. Without protection of one's right to own property, these
other rights would have little meaning.(14)When property rights are
both respected and protected a person is able to keep and enjoy the fruits
of his or her labor. Private property is vital to free markets, maximum
productivity, and political freedom. As communist regimes have made abundantly
clear, when the state controls a society's productive resources, it also
stifles liberty by suppressing dissent and enforcing conformity to the
state ideology. Conversely, in systems that respect private property rights
political power is more diffuse, and the people more free to pursue personal
happiness. GOVERNANCEGovernance involves the
exercise of authority and the right to direct, lead, and control. On the
one hand, it implies a need to possess the requisite power and authority
to achieve certain goals. On the other hand, in a free society there is
a need to limit this power and authority to specific areas. Thus, governance
includes the consideration of the interrelated topics of authority, power,
justice, law, pluralism, and constitutionalism. Power is the force by means
of which one can oblige others to obey him. Authority is the right to
be obeyed by others. Power without authority amounts to tyranny. The central
problem is thus one of legitimacy.(15)Aristotle was fully aware
of the close connection among property rights, the moral sphere, and constitutional
government. The influence of Aristotle's ideal of an agrarian polity and
belief that a large middle-class is vital to politically stability is obvious
in the writings John Locke, and of the American Founders, especially Thomas
Jefferson. Over the past 200 years,
the American political ethos has shifted from the Greek idea that the good
society fosters justice and vice versa to the Roman idea that justice equals
law and is concerned with personal rights, i.e., we have become legalistic.
The Roman lawyers held that justice was not a function of the whole society,
but rather a specialized function and the concern of the legal sphere.
Contemporary positive jurisprudence is descended from this legal-moral
dichotomy.(16)Pluralism implies diversity
and conflict, and requires both associationism and individualism. A pluralistic
society diffuses power into many associations, thus assuring individual
freedom from tyranny. The principle of subsidiarity holds that the state
should restrict its activities to those that private associations cannot
effectively perform. Our skepticism of state power favors the placement
of as many voluntary groups as possible between the state and the individual.(17)Pluralism and constitutionalism
share a skepticism toward the concentration of power. In our society, each
man finds himself with many competing loyalties, making it impossible to
give his whole allegiance to anyone association or person. Constitutional
governments are characterized by legal restraints imposed on power holders
to ensure that individual rights will not be transgressed. As an instrument,
the Constitution is a grant of powers; as a statement of the rights of
the people, it is a limitation on the power of the state. THE ROLE OF THE STATEAmerica was founded on an
explicit philosophy of individual rights. The Founding Fathers held the
view that government must be limited by the rights of the individual and
that its purpose is to maintain a framework within which individuals can
pursue their own self-interest within a competitive marketplace. Early
in this century, however, attitudes toward limited government and judicial
restraint changed, resulting in an increasingly large, intrusive federal
government. A new type of regulation,
so-called "social" regulation, gained adherents after World War II.
Unlike economic regulation, which focuses on market or economic variables
and entry to or exit from markets, social regulation focuses on firms'
impacts on people as employees, consumers, and citizens. Social regulations
are aimed at providing protection from discrimination in employment; assuring
safe and healthful workplaces; protecting consumers from unsafe products;
and protecting citizens from environmental pollution.(18)The growth in social regulation
signaled an increasing role for government in the affairs of businesses
of all sizes. This power shift from managers to government bureaucrats
has led to a blurring of the distinction between private power and public
power. The U.S. Constitution provides for various, minimal, forms
of intervention such as: (1) the power to regulate interstate and foreign
commerce; (2) the power to tax and spend; (3) the power to borrow; and
(4) the power to promote the general welfare. Our goal ought to be to have
a substantially free market system that is prevented by law from accumulating
monopolistic or oligopolistic control of a given market. The addition of
"social responsibility" to this equation is both unwarranted and unwise. CONCLUSIONDemocratic capitalism is
a complex concept consisting of three dynamic and converging systems. The
economy is based on a substantially competitive market system, private
ownership, and economic freedom. The political system is based on consent
by the people, limited government power, a reliance on checks and balances,
and a legal order that protects individual rights and voluntary exchange.
Economic and political freedom are inextricably linked in democratic capitalism.
The ideas of a market economy and political democracy stem from the same
reasoning and the same moral-cultural values, institutions, and assumptions.
Both the economic sector and the political sector affect and are affected
by the moral-cultural sphere, which reflects ideals such as freedom, justice,
productivity, and hard work. Critics of democratic capitalism
reduce self-interest to greed, opportunism, or selfishness, and charge
that the pursuit of self-interest intrinsic to the market system reinforces
conspicuous consumption and emphasizes "having" rather than "being." While
there are trade-offs between the efficiency values of the marketplace and
the egalitarian values of democracy, democratic capitalism maximizes social
welfare by making the market more humane and the government more efficient.

The author
is grateful to the following individuals for their useful comments and
suggestions:

1. More than any other author,
Michael Novak has identified and analyzed the underlying ideas that make
our system of democratic capitalism meaningful. Although virtually all
of his writings contribute to his construction of a theory of democratic
capitalism, the following four books in particular have made his case especially
well: The Spirit of Democratic Capitalism (New York: Simon and Schuster,
1982); Free Persons and the Common Good (Lanham, MD: Madison Books,
1989); This Hemisphere of Liberty: A Philosophy of the Americas
(Washington, DC: AEI Press, 1991); and The Catholic Ethic and the Spirit
of Capitalism (New York The Free Press, 1993). >1>

10. Milton Friedman, Capitalism
and Freedom (Chicago: University of Chicago Press, 1962) and "The Social
Responsibility of Business Is To Increase Profits," New York Times Magazine,
September 13, 1970, pp. 32-34, 122-126; Friedrich A. Hayek, "The Corporation
in a Democratic Society: In Whose Interest Ought It and Will It Be Run?"
in Melvin Anshen and George Bach, eds., Management in the Corporation:
1985 (New York: McGraw-Hill, 1960); and Tibor R. Machan, Capitalism
and Individualism (New York: St. Martin's Press, 1990). >10>

12. Robert Benne, The
Ethic of Democratic Capitalism (Philadelphia: Fortress Press, 1981);
Richard Weaver, Ideas Have Consequences (Chicago: University of
Chicago Press, 1948); Eric Voegelin, The New Science of Politics
(Chicago: University of Chicago Press, 1952); and Stanley Rothman, "American
Entrepreneurship," The World and I (November, 1991). >12>

13. Amitai Etzioni, The
Spirit of Community (New York: Crown Publishers, 1991) and The New
Golden Rule: Community and Morality in a Democratic Society (New York:
Basic Books, 1997). >13>

17. Eells and Walton, pp.
435-438; Robert Nisbet, The Quest for Community: A Study in the Ethics
of Order (New York: Oxford University Press, 1953); Robert A. Dahl,
Pluralistic Democracy in the United States: Conflict and Consent
(Chicago: Rand McNally and Co., 1967); Gregory McLennan, Pluralism (Minneapolis,
MN: University of Minnesota Press, 1995). >17>